Quarles & Brady Tax Newsletter
April Edition 03/30/11 Thomas J. Phillips
This edition contains the following articles:
Welcome to the April 2011 edition of the Quarles & Brady LLP Taxation Group's newsletter dedicated to keeping you apprised of newsworthy tax developments.
Of the 142,823,105 individual income tax returns filed in calendar year 2009, 1,581,394 individual income tax returns (1.1 percent) were examined by the IRS in the government's fiscal year 2010. Of the 2,143,808 corporate income tax returns (excluding S corporation returns) filed in calendar year 2009, 29,803 corporate income tax returns (1.39 percent) were examined by the IRS in the government's fiscal year 2010.
(Source: Internal Revenue Service Data Book, 2010, Publication 55B, Washington, D.C., March 2011)
The Tax Relief, Unemployment, Insurance Reauthorization and Job Creation Act of 2010 ("Tax Relief Act"), signed by President Obama on December 17, 2010, deferred the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") sunset provisions from after December 31, 2010 to after December 31, 2012. As a result, the noncorporate ordinary income tax rates of 35 percent, 33 percent, 28 percent, 25 percent, 15 percent and 10 percent continue through December 31, 2012.
Under EGTRRA, the maximum capital gains rate for noncorporate taxpayers on capital gains other than on collectibles and unrecaptured section 1250 gains was 20 percent. The Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA") reduced the maximum 20 percent capital gain rate to 15 percent and applied a 15 percent rate to qualified dividends (in lieu of ordinary income rates) for noncorporate taxpayers. Although the JGTRRA rates were scheduled to expire for 2009, the sunset was extended to years after 2010 by the Tax Income Prevention and Reconciliation Act of 2005 ("TIPRA"). The Tax Relief Act also deferred the TIPRA sunset provision from after December 31, 2010 to after December 31, 2012. As a result the noncorporate taxpayer maximum capital gains rate on capital gains other than collectibles and unrecaptured Section 1250 gains, and the rate on qualified dividends continues to be 15 percent through December 31, 2012. These rates also apply for alternative minimum tax purposes.
Recently, the IRS reaffirmed its ruling policy for a rescission of a transaction and said it will review its policy. (Daily Tax Reporter, 17 DTR G-10 (January 26, 2011)). The IRS rescission policy is based on Rev. Rul. 80-58, 1980-1 CB 181. As applied by the IRS, in order to have a valid rescission:
- There must be a contract that can be undone.
- The rescission transaction must be completed in the same taxable year as the original transaction.
- The parties must be restored to their status quo before the original transaction.
- The rescission is affected by one of three ways, such as mutual agreement of the parties.
Where the rescission requirements are met, a transaction, such as a sale of real estate or a sale of the stock or assets of a corporation, can be voided after the fact with no resulting income tax liability.
The IRS standard mileage rates for 2011 are 51 cents per mile for business miles, 14 cents per mile for charitable service miles and 19 cents per mile for medical or moving expenses (Notice 2010-88, 2010-51 I.R.B. 882 (December 3, 2010)).
Beginning January 1, 2011, paid income tax return preparers for individuals, trusts and estates who reasonably expect to file 100 or more returns in 2011 generally are required to file the returns electronically. The 100 or more threshold also applies to preparers of a firm who meet that threshold in the aggregate. Beginning January 1, 2012, the threshold is reduced to 11 or more income tax returns that the preparer or the preparer's firm in the aggregate expect to file in 2012 for individuals, trusts and estates. Return preparers will have to obtain an Electronic Filing Identification Number.
Certain exclusions from the electronic filing requirement are provided, such as when a preparer's individual client chooses to have the return completed in paper format, and the client will file the paper return. (IR-2010-116 (December 1, 2010)).
FinCen has issued final regulations concerning the Report of Foreign Bank and Financial Accounts (Form TD-F 90-22.1) ("FBAR") (31 CFR §1010.350). The FBAR regulations are effective March 28, 2011 and apply to FBARs required to be filed by June 30, 2011 with respect to foreign financial accounts maintained in calendar year 2010, and for FBARs required to be filed for subsequent years. An FBAR for a calendar year is required to be filed by June 30 of the following calendar year.
The FBAR regulations attempt to clarify the rules which were previously largely contained in the instructions to the FBAR.
Under the FBAR regulations, "[e]ach United States person having a financial interest in, or signature or other authority over a bank, securities, or other financial account in a foreign country…" the value of which exceeds $10,000 must file an FBAR with the U.S. Department of the Treasury. For this purpose a bank account is an account maintained with a person in the business of banking. A securities account is any account with a person in the business of buying, selling, holding or trading stock or other securities. The term "other financial account" means (i) an account with a person in the business of accepting deposits as a financial agency; (ii) an account which is an insurance or annuity policy with a cash value; (iii) an account with a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange; or (iv) an account with a mutual fund or similar pooled fund that issues shares available to the public and has a regular net asset value determination and regular redemptions. The FBAR regulations reserve the question of whether private equity funds or similar funds are reportable accounts. There are exceptions to the reporting requirement for certain accounts of, or which involve, a government, or which are maintained by banks and used solely for bank to bank settlements.
A U.S. person has "a financial interest in each bank, securities or other financial account in a foreign country" for which the U.S. person is the owner of record or has legal title - whether the account is maintained for the U.S. person's benefit or for the benefit of others. Where an account is maintained in the name of more than one person, each U.S. person in whose name the account is maintained has a financial interest in that account.
Also, a U.S. person has "a financial interest in each bank, securities or other financial account in a foreign country" for which the owner of record or holder of title is:
- a person acting as an agent or in some other capacity on behalf of the U.S. person;
- a corporation in which the U.S. person owns directly or indirectly more than 50 percent of the voting power or the total value of the shares;
- a partnership in which the U.S. person owns directly or indirectly more than 50 percent of the interest in profits or capital;
- a trust if the U.S. person is the trust grantor and is treated as an owner of a portion of the trust for U.S. federal tax income purposes;
- a trust in which the U.S. person either has a present beneficial interest in more than 50 percent of the assets or from which the U.S. person receives more than 50 percent of the current income. However, the U.S. person is not required to file an FBAR to report the trust's foreign financial accounts if the trust, trustee of the trust or agent of the trust is a U.S. person who files an FBAR to report the trust's foreign financial accounts; or
- any other entity in which the U.S. person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets or interest in profits.
The words "signature or other authority" means the authority of an individual (alone or with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (in writing or otherwise) to the person with whom the financial account is maintained. Officers or employees of certain entities regulated by the U.S. government or whose equity securities are listed on a U.S. national securities exchange or registered under the U.S. Securities Exchange Act need not file an FBAR reporting that the officer or employee has signature or other authority over a foreign financial account if the officer or employee has no financial interest in the account.
A U.S. person having a financial interest in, or signature or other authority over 25 or more foreign financial accounts need only provide in the FBAR the number of accounts and certain basic information, but will be required to provide detailed information for each account when requested.
Participants and beneficiaries in qualified retirement plans or individual retirement accounts are not required to file an FBAR for a foreign financial account held by, or on behalf of, the retirement plan or IRA.
A U.S. person entity which owns directly or indirectly more than a 50 percent interest in one or more entities required to file an FBAR may file a consolidated FBAR.
The IRS announced a special voluntary disclosure initiative to attract people with undisclosed income in foreign accounts to get current with their income taxes. This is the second voluntary disclosure initiative by the IRS (the first voluntary disclosure initiative was in 2009) and will be available through August 31, 2011. The new initiative contains a higher penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers may be eligible for 5 or 12.5 percent penalties. In addition, taxpayers participating in the initiative must file all original and amended returns and include payment for back taxes, interest and accuracy-related and/or delinquency penalties for up to eight years by August 31, 2011 (IR-2011-14 (February 8, 2011)). The 25 percent (12.5 percent or 5 percent) penalty is in lieu of any FBAR and information return penalties (Memorandum from Steven T. Miller, IRS Deputy Commissioner for Services and Enforcement, March 1, 2011).
The IRS has issued guidance to taxpayers regarding how to answer questions concerning foreign financial accounts contained in 2010 federal income tax and information returns (See, for example, Schedule B of Form 1040, the "Other Information" section of Form 1041, Schedule B of Form 1065, and Schedule N of Form 1120) (Notice 2011-31, March 30, 2011). In response to the final FBAR regulations, the IRS - on March 26, 2011 - published a revised FBAR form with accompanying instructions. The guidance provides that for returns filed on or after March 28, 2011, the final FBAR regulations will be effective and should be referenced along with the revised FBAR form and instructions when answering foreign financial account-related questions on 2010 tax and information returns. The guidance also provides that for returns filed before March 28, 2011, either the prior FBAR regulations (last amended 1987) along with other then existing FBAR guidance or the final FBAR regulations and revised FBAR instructions may be referenced when answering the foreign financial account questions on 2010 returns.
Questions about the subject matter of this communication should be addressed to Thomas J. Phillips at (414) 277-5831 / [email protected] or your Quarles & Brady attorney.